Watch HowardCohodas Trade Index Options Credit Spreads

This is a discussion on Watch HowardCohodas Trade Index Options Credit Spreads within the Trading Journals forums, part of the Reception category; Liking this Howard. Assuming 160/2500 is average, 10% risk, we're looking at 15 trades a month if you compound right ...

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Old Dec 2, 2010, 12:44pm   #50
 
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Re: Watch HowardCohodas Trade Index Options Credit Spreads

Liking this Howard. Assuming 160/2500 is average, 10% risk, we're looking at 15 trades a month if you compound right (give or take)?
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Old Dec 2, 2010, 12:58pm   #51
 
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Re: Watch HowardCohodas Trade Index Options Credit Spreads

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Originally Posted by sj8070 View Post
Howard,
From what I have read so far of your system is that it seems to me that you have no "edge" as it were.

The expected value of an Iron Condor, must be zero, otherwise you are claiming that markets are not perfectly competitive or liquid in this way. If you believe that an Iron Condor will produce a positive return in the long run you are taking the view that the underlier is actually less volatile than the markets have priced in.

Perhaps I have misunderstood your work.

It may be easier to answer this question:
"Do you believe that this strategy would be successful in a Simple Random Walk Environment, whereby the underlier is totally random, and if not, what inferences from the market to you make to ensure that your long-run expectations are positive?"
The fundamental principles that my strategy takes advantage of is that time moves forward and that options have a finite life. If they are OTM they must expire with a value of zero.

The use of a spread offers two additional advantages. First, the downside is limited at the cost of a limited upside. Second, margin requirements are to my advantage because the loss is limited.

The formation of an Iron Condor is just icing on the cake. A second spread can be sold without the need for any additional margin than was required for the original spread. There is some additional risk, compensated for by the additional credit.

The only unique added value (as far as I am aware) that I bring to the table over what others have written about is the use of Probability of Touching as a key to choosing how far OTM the short option must be.

Another technique I use has been mentioned by some others but does not appear to be widely used. That is, actively managing the spreads throughout their lives. I do not consider credit spreads a "set it and forget it" strategy. If I have formed an Iron Condor and the market begins trending, I can frequently close the spread that achieves most of its value and enter a new spread reforming the Iron Condor. I have referred to this elsewhere as rolling. On one NOV 10 expiration Iron Condor, because of trending, I had a small loss of the CALL spread but had three nice profits on the PUT side. The trending market is often cited as problematic for Iron Condor traders. I have frequently gained more profit from a trending market than if the market had just moved sideways and the initial two spreads expired quietly.
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Old Dec 2, 2010, 1:17pm   #52
 
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Re: Watch HowardCohodas Trade Index Options Credit Spreads

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Originally Posted by Hotch View Post
Liking this Howard. Assuming 160/2500 is average, 10% risk, we're looking at 15 trades a month if you compound right (give or take)?
I'm not quite able to connect the two ideas you mention. Permit me to ramble a bit in the hope that I will answer your question.

I scale by selling more spreads.

Were I not planning to teach this material formally, I would stick to one index rather than the three I trade. I chose three to cover the range of account sizes that might be found among the students. Showing real examples is more meaningful for several reasons. It better engages the student. And it illustrates that different indexes present different challenges in terms of bid/ask spread, likelihood of prompt fills, etc.

The basic approach would have four spreads open at any given time for a single index. Two for the next expiration and two for the one after that. I'm in two monthlies at once because I like to open the spread before the time decay curve reaches the "knee" so that I get a generous credit. Rolling opportunities add to the number of total spreads, but not to the simultaneously open ones.

Adding weeklies and quarterlies, available on some indices, adds two more spreads per period. At the moment, weeklies and quarterlies are in the preproduction phase (small money) of qualification.

The example that has been bandied about (160, 2500) was in fact one of my preproduction weeklies and not the production spreads I trade with serious money.
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Old Dec 2, 2010, 1:39pm   #53
 
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Re: Watch HowardCohodas Trade Index Options Credit Spreads

I was just attempting to get some handle on the figures. I didn't see that you scaled in, but the simple thinking was:

10% risk, on such R:R gives 0.64% return, 1.0064^15 = 1.1 ish, so 15 trades a month makes your 10%.
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Old Dec 2, 2010, 2:05pm   #54
 
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Re: Watch HowardCohodas Trade Index Options Credit Spreads

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Originally Posted by Hotch View Post
I was just attempting to get some handle on the figures. I didn't see that you scaled in, but the simple thinking was:

10% risk, on such R:R gives 0.64% return, 1.0064^15 = 1.1 ish, so 15 trades a month makes your 10%.
See if this post clears things up a bit.
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Old Dec 2, 2010, 8:27pm   #55
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Re: Watch HowardCohodas Trade Index Options Credit Spreads

I'm guessing you short iron condors most of the time. I find this interesting as in a ranging market you are basically legging the options to get the most out of the premiums? Is this right?

So if FTSE is in a range 5600-5800, you buy a call at 6000 when the market is at 5600 and sell a put 5500. Then when the market is at 5800 you buy a put at 5400 and sell call at 5900, and that makes a perfect iron short iron condor? somewhat anyway. and obviously because of the wings your margin is lower than a strangle.
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Old Dec 2, 2010, 8:50pm   #56
 
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Re: Watch HowardCohodas Trade Index Options Credit Spreads

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Originally Posted by brettus View Post
I'm guessing you short iron condors most of the time. I find this interesting as in a ranging market you are basically legging the options to get the most out of the premiums? Is this right?

So if FTSE is in a range 5600-5800, you buy a call at 6000 when the market is at 5600 and sell a put 5500. Then when the market is at 5800 you buy a put at 5400 and sell call at 5900, and that makes a perfect iron short iron condor? somewhat anyway. and obviously because of the wings your margin is lower than a strangle.
My strategy is to trade credit spreads as a unit. The price of the legs is immaterial. By specifying the credit required, the fill does not take place unless that price, or better, is obtained.

The Iron Condor is just the icing on the cake. The spread that completes the Iron Condor must be able to stand on its own. The icing part is that no additional funds are quarantined (margin) to put on the second spread of an Iron Condor. This provides a nice profit boost with some small additional risk.
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